Tuesday, January 3, 2012

Uruguay 2011 Article IV Consultation IMF

The strong growth has continued into 2011, but a slowdown is underway supported by prudent macroeconomic policies. Still, the labor market is tight, wages are rising rapidly, and inflation remains above target.

The highly uncertain international outlook presents substantial downside risks. Uruguay’s economic and financial vulnerabilities are modest, and the government has reduced debt vulnerabilities significantly and built important financial buffers; still the spillovers of a deteriorating global outlook could be significant.

The immediate challenge is to support an orderly moderation in growth and inflation while reinforcing the economy’s resilience to spillovers from abroad. Staff agrees with the authorities on the key aspects of their macroeconomic framework.

Maintaining the flexible exchange rate as a shock absorber is crucial. The broadly neutral fiscal stance in 2011 and also planned for 2012 is appropriate. Monetary policy has rightly been on pause since September until the outlook becomes clearer. If the economy takes a turn for the worse, monetary policy could be relaxed provided inflation expectations become reasonably anchored, while fiscal automatic stabilizers should be allowed to operate so long as prudent debt dynamics are maintained. While it would be important to accommodate a real exchange rate depreciation, if needed, part of the ample reserves could be used to contain overshooting.

A long-term challenge is to sustain high growth with less volatility than in the past, which will require tackling infrastructure gaps, raising labor skills, and increasing further the economy’s resilience to shocks.